What should I do – Keep money in an Offset Account or make Extra Mortgage Repayments?

Are you trying to decide whether to keep your savings in an offset account or make extra payments to your mortgage? In this article, we'll discuss some crucial factors, including interest rates, tax deductions, liquidity, and financial flexibility, that can help you make an informed decision that aligns with your financial goals.

What is an offset account?

An offset account, also known as a linked account, is a transactional account that can help reduce the amount of interest you pay on your mortgage. By maintaining a balance in this account, you can offset the interest on your mortgage and save money over the life of the loan. For instance, if you have a $500,000 mortgage and keep $100,000 in your offset account, you'll only pay interest on the remaining $400,000.?

Pros of using an offset account:

• Reduced interest payments: The most obvious benefit of using an offset account is that it can reduce the amount of interest you pay on your mortgage, potentially saving you thousands of dollars in interest over the life of the loan.
• Access to your savings: An offset account allows you to keep your savings separate from your mortgage and access the money when you need it. This can be particularly useful if you need to make an emergency purchase or capitalize on an investment opportunity.
• Flexibility: An offset account is a flexible solution that allows you to add or withdraw funds as you need to. This gives you the ability to adjust your savings strategy to meet your changing needs and goals.

Cons of using an offset account:

• Lower interest: The interest you may save by keeping money in an offset account is often lower than what you can get by investing the same money in other investments.
• No contribution to your home equity: Keeping your savings in an offset account doesn't contribute anything additional to your home equity.

Pros of making extra mortgage payments:

• Reduced mortgage term: Making extra payments on your mortgage can help reduce the term of your loan, saving you on the total interest over the life of the loan.
• Increased home equity: Every extra payment you make to your mortgage increases your equity in the property, which can be a valuable asset if you decide to sell your home in the future.

Cons of making extra mortgage payments:

• Lack of flexibility: Once you make an extra payment to your mortgage, you can't easily access that money. This can limit your flexibility to use your funds in case of an emergency.
• Opportunity cost: Putting extra funds towards your mortgage means you miss out on the opportunity to invest those funds and potentially earn a higher return.

So, what should you do?

Ultimately, the decision of whether to keep your savings in an offset account or make extra payments to your mortgage comes down to your personal financial situation and goals. If you're looking for flexibility, access to your savings, and an opportunity to invest further, keeping money in an offset account may be a good option.

However, if your primary goal is to pay off your mortgage as quickly as possible, increase your home equity, and minimize interest costs, making extra payments may be a better choice.

When deciding on a savings strategy, it's important to consider your overall financial strategy, including your investment goals and risk profile. If you're comfortable with taking on more risk, investing your savings in high-yield investments may be a good option, as it could potentially earn you a higher return and build wealth over time.

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